ECO 1102 Lecture Notes - Lecture 23: Overnight Rate, Money Supply, Autarky

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ECO 1102 Lecture Notes - Lecture 22: Risk-Free Interest Rate, Tax Bracket, Credit Risk

ECO 1102 Lecture Notes - Lecture 23: Overnight Rate, Money Supply, Autarky

ECO 1102 Lecture Notes - Lecture 25: Real Interest Rate, Seigniorage, Aggregate Demand

Document Summary

Refers to the money that the bank has in physical in order to meet daily requests for cash asset. It is the percentage of total demand deposits. A fraction of demand deposits that the bank holds as a cash reserve. The bank may also choose to keep reserves that are not required for everyday cash requirements, they are known as excess reserves . It is a statement that demonstrates a bank"s assets and liabilities. They include deposits, claims, assets, loans, reserves. The key takeaway is that the bank does not have an impact on the money supply. Money supply may increase by the amount given in the third loan as demonstrated in the slide examples. This process will continue in a cycle of lending and depositing where money will continue to be created and the supply increasing which each new loan that will be created. Reductions in overnight rate increase money supply similar to the example in 2008-2009.

Related Questions

Suppose that Bob withdraws $100 of cash from his checking account at Security Bank and uses it to buy a camera from Jor, who deposits the $100 in his checking account in Serenity Bank. Assuming a reserve ratio of 10 percent and no initial excess reserves, determine the extent to which (a) Security banks must reduce its loans and demand deposits because of the cash withdrawal and (b) Serenity Bank can safely increase its loans as demand deposits because of the cash deposit. Have the cash withdrawal and deposit changed the money supply?

Assets	Liabilities
Reserves $2,000	Deposits $10,000
Loans 8,000

Refer to Table.

Starting from the situation as depicted by the T-account, if someone deposits $500 into the First Bank of Fairfield, and if the bank makes new loans to keep its reserve ratio unchanged, then the number of new loans that it makes will be $320.

$400.
$680.
$750.

2.
Bank of Springfield

Assets		Liabilities
Reserves	$19,200	Deposits	$240,000
Loans	228,000

1. If the Bank of Springfield has lent out all the money it can given its level of deposits, then what is the reserve requirement?

5.00 per cent
8.00 per cent
8.42 per cent
95.00 per cent

2. Mia puts money into a piggy bank so she can spend it later. What function of money does this illustrate?

store of value
medium of exchange
unit of account
None of the above is correct.

3. Under a fractional-reserve banking system, banks

hold more reserves than deposits.
generally lend out a majority of the funds deposited.
cause the money supply to fall by lending out reserves.
All of the above are correct.

4. Over one-time horizon or another, Fed policy decisions influence

inflation and employment.
inflation but not employment.
employment but not inflation.
neither inflation nor employment.

5. If a bank desires to hold no excess reserves, the reserve requirement is 5 per cent, and it receives a new deposit of $1,000

its required reserves increase by $50.
its total reserves initially increase by $1,000.
it will be able to make a new loan of up to $950.
All of the above are correct.

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6. we noted that in ancient times money was normally created by government. However, under the modern banking system in the U.S. and other developed countries, money is normally created by Banks. The process begins when a depositor brings, letâs say, $100 in M1 into the bank for deposit. The bank accepts the deposit and creates a Demand Deposit (DD) for the customer in the amount of $100. The bank now has $100 in liquid funds it did not have before. As discussed in class, there are three things the bank can do with this new money: 1) It can keep the money as Vault Cash (a lot of it inside of ATM machines), 2) It can place the money on deposit at the Federal Reserve Bank (Fed) to be held as Reserves, 3) It can purchase securities for the bankâs securities portfolio. The contents of the bankâs security portfolio will not be included in M1. What is it about the definition of M1 that precludes the inclusion of the bankâs securities portfolio?

7. As discussed in class, all bank deposits at the Federal Reserve Bank (Fed) qualify as Reserves. However, not all Reserves are the same. The Fed makes a distinction between Required Reserves, and Excess Reserves. What is the difference between Required Reserves and Excess Reserves?

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ECO 1102 Lecture Notes - Lecture 23: Overnight Rate, Money Supply, Autarky

ECO 1102 Lecture Notes - Lecture 22: Risk-Free Interest Rate, Tax Bracket, Credit Risk

ECO 1102 Lecture Notes - Lecture 23: Overnight Rate, Money Supply, Autarky

ECO 1102 Lecture Notes - Lecture 25: Real Interest Rate, Seigniorage, Aggregate Demand

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